Australia Ends Taxes on Indian Firms’ Offshore Income; Postpone part of the trade deal

IT majors, including TCS, Infosys and Wipro, will benefit greatly from a trade deal signed by India and Australia on Saturday, as Canberra agreed to amend its national laws to tax Indian firms’ offshore earnings, who offer technical services to be hired there.

A leading source told FE the move will correct an anomaly in the 1991 Double Taxation Agreement (DTAA) between the two countries and allow Indian IT and ITeS players to expand their operations in Australia. According to an industry estimate, the anomaly may have cost Indian IT companies around US$1.3 billion since 2012.

Canberra’s decision to streamline the law is part of the India Australia Economic Cooperation and Trade Agreement (ECTA). Both Trade and Industry Ministers Piyush Goyal and his Australian counterpart Dan Tehan have formally confirmed the decision in official letters, the source said. It will come into force when ECTA comes into force after the agreement has been ratified by the Australian Parliament, which is expected to take 3-4 months.

Applying the provisions of the Indo-Australia DTAA, Canberra will tax income from offshore IT services provided from India as royalties even if the same income is also taxed in India.

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Usually, most of the projects that IT companies take on involve on-site work and some from India. Interestingly, Australia’s own national laws do not provide for the taxation of such offshore income. However, the 1991 DTAA Agreement was worded in such a way that the Federal Court of Australia ruled in a judgment against Tech Mahindra in October 2018 that the payments an Indian company receives from its customers in Australia are taxed in Australia as “royalties”. , although there are no provisions in local law governing the taxation of such income.

The DTAA is typically a tax treaty between two or more nations to avoid being taxed twice on the same income. It occurs when a taxpayer is resident in one country and earns income in another country when those two countries have entered into such an agreement. But ironically, India’s DTAA with Australia inadvertently violated this very spirit of such treaties. Rather than acting as a taxpayer’s shield, the DTAA has proven to be the taxman’s sword.

A spokesman for IT industry association Nasscom welcomed the proposed change, saying: “Nasscom will continue to work with both governments and is confident that changes to Australian domestic law will soon be made in the upcoming parliamentary session to seal this intention.”

Since 2000, major IT companies such as Infosys, TCS, Wipro, Tech Mahindra Satyam and HCL have increased their operations in Australia but this taxation continues to be an issue for them. So once it’s solved, those companies can significantly increase their business there, according to an IT industry executive.

According to Nasscom, India’s IT services industry grew 2.7% YoY in FY21 to $99 billion. The broader industry, including e-commerce, business process management and global back offices, grew 2.3% in FY21 to $194 billion. According to the RBI data, Australia and New Zealand together accounted for 3.1% or US$4.2 billion of India’s software services exports in FY21.

Rohinton Sidhwa, Partner at Deloitte India, said: “If the negotiations result in the Australian Government recognizing its right to tax such income, it would be a major victory for the Indian Government.”

The Australian Federal Court’s decision that a right to tax income under a DTAA can be exercised even if the income is not taxable under Australian domestic tax law effectively goes against the principles of why agreements are signed in the first place, Sidhwa said.

“Agreements are generally not designed to create a burden that does not primarily exist. An amendment to Australia’s domestic law would be required to overturn the Federal Court’s ruling,” he said. Australia Ends Taxes on Indian Firms’ Offshore Income; Postpone part of the trade deal

Chris Barrese

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